Gold Shines As The Fed Grapples With Financial Instability
EDITOR'S NOTE: With the Federal Reserve facing the daunting challenge of managing a hard economic landing and growing financial instability, investors are seeking refuge in time-tested assets like gold. The precious metal's price outlook has been revised upward by double digits, reflecting the heightened uncertainty and increased demand for safe-haven investments. In this comprehensive analysis, we explore the factors driving gold's performance, the constraints faced by the Fed, and the potential implications for investors in the midst of an increasingly dismal financial landscape.
(Kitco News) The failure of Silicon Valley Bank and Signature Bank is a game-changer for gold and silver as it confirms that the Federal Reserve has broken something vital during its fastest tightening pace in decades, according to MKS PAMP's updated price forecasts.
The firm revised its gold and silver 2023 average price projections by $50 and $24, respectively.
"Gold revised up $50 to $1930/oz (from $1880/oz) – hard landing & financial instability risks escalate handcuffing the Fed. Prices will print new all-time highs this year, but conviction lies in higher floors vs. runaway upside repricing," said MKS PAMP head of metals strategy Nicky Shiels. "Silver revised up to $24/oz (from $22.50) - upside risks contingent on Gold outperformance & investor resubscription."
As the Fed aggressively raised rate over the past year to tame inflation, bringing its key policy rate from around zero to a range of 4.75%-5%, many warned that something in the economy would break. Now, the markets are seeing the evidence. And the consequences of these regional bank failures will trigger a test of new record highs in gold, Shiels pointed out.
"The developments in March officially confirm that the Fed has broken something more important within the broader financial markets," she wrote. "The Fed will have to choose between higher inflation, a harder landing or financial instability; all outcomes will keep safe havens in play, and gold prices will likely retest and pierce all-time highs ($2070/oz) this year. Silver is overdue a strong upside repricing once/if investors resubscribe (capital is just not being convincing deployed)."
With these new risks top of mind, a Fed U-turn is expected as markets price in more bank failures, additional policy bailouts, and weaker economic activity. All of this is mixed with the existing high-inflation environment.
"A Wall Street crisis is increasingly likely to morph into a Main Street crisis which will force the Fed to U-turn & reverse course on policy this year. Historically and for decades, the Fed has overdone it, shown by the fact that Fed Funds tend to peak and not remain 'higher for longer' even in higher inflation regimes (e.g: 1980s)," Shiels explained.
This is when gold and silver come in. The rally already began, but there is more to come, especially in the case of silver, as the precious metals sector still has some risks to price in.
"Gold has partly priced in the lower probability of U.S. soft landing; it also somewhat priced in more financial & economic uncertainty and less Fed hikes. It's not really pricing further policy bailouts & backstops and/or Fed rate cuts (prices then would usurp the previous' peak liquidity' highs of $2070/oz)," Shiels noted. "Gold is waiting for that other shoe(s) to drop, which will likely take the form of a notably weaker US$, already under pressure from relatively tighter & hawkish monetary policy in Europe; that will provide a positive feedback loop for Gold prices."
Other reasons why MKS PAMP revised its price forecasts included the rising geopolitical tensions, the negative outlook for U.S. stocks, and the global de-dollarization trend, Shiels added.
Originally published by: Anna Golubova on Kitco News
